How to Get Tax Benefits From Educational Savings

Tuition costs rise each year by an average of 8 percent, according to the Bureau of Labor Statistics. So it makes sense for parents to start saving for their child's college education as soon as possible. Another incentive to save for your child's education is the tax benefits you can expect. Follow these steps to gain tax benefits from educational savings.

Instructions

Difficulty: Moderate

1. Enjoy accumulating tax-deferred savings when you open a section 529 college savings plan, the easiest and most common educational savings vehicle. This investment plan allows your money to grow at rates at least as high, and often higher, than tuition costs.
2. Withdraw money from 529 college savings tax-free as long as you use it for qualified education expenses.
3. Look into whether your state offers tax benefits to college savings contributions. Many states allow complete or partial tax deductions on state returns. Check and see what limits your state sets on contributions for tax benefits.
4. Reduce the value of your estate with a 529 college savings account and improve your chances on the FAFSA (Free Application for Federal Student Aid) that most colleges require for scholarship and grant applicants.
5. Investigate whether a Coverdell Education Savings Account (ESA) is right for you. Although not deductible, contributions up to $2000 grow tax-free. When distributions from a Coverdell ESA are less than college expenses in a year, the beneficiary of the account doesn't owe tax on the distributions.
6. Invest in US Treasury Savings Bonds in an education savings bond program. You can exclude the interest from your income as long as the bonds pay for college expenses for a dependent on your tax return and your modified adjusted growing income is under $78,100 or $124,700 for joint returns.

Tips & Warnings

• Use Form 8815 at tax time for education savings bond interest exclusion.
• Contact the IRS or a tax advisor about other education tax benefits, like credits and deductions.